2014-VIL-896-ITAT-AHM

Income Tax Appellate Tribunal AHMEDABAD

I.T.A. No.735/Ahd/2013

Date: 13.05.2014

LARSEN & TOUBRO LIMITED L&T TECHNOLOGY CENTRE

Vs

THE ITO (INTERNATIONAL TAX), BARODA

For the Appellant : Shri Sanjay R. Shah
For the Respondent : Shri P. L. Kureel, Sr. D. R.

BENCH

Shri Kul Bharat And Shri T. R. Meena,JJ.

JUDGMENT

Per Shri Kul Bharat, Judicial Member :

This appeal by the Assessee is directed against the order of the Ld.Commissioner of Income Tax(Appeals)-Gandhinagar(‘CIT(A)’ for short) dated 31/12/2012 pertaining to Assessment Year (AY) 2008-09. The Assessee has raised the following grounds of appeal:-

The appellant being dissatisfied with the order passed by the Commissioner of Income Tax (Appeals) - Gandhinagar, (Learned Commissioner), prefers a appeal against the same on the following amongst other grounds, which are without prejudice to each other.

1. The order passed by the learned Commissioner of Income Tax (Appeals) is erroneous and contrary to the provisions of law & facts and therefore requires to be suitably modified. It is submitted that it be so done now.

1.1. The order passed by the learned Commissioner is not a speaking order as none of the contentions of the Appellant have been dealt with while rejecting them and adjudication has been made solely based on a case law in which facts were different as also Appellant’s contentions were not dealt with. It is submitted it be so held now.

2. Learned Commissioner has erred in upholding the learned AO’s decision to consider the appellant to be assessee in default u/s.201(1) of the Act and subject to interest u/s.201(1A) of the Act. It is submitted it be so held now.

2.1 Learned Commissioner has erred in disregarding the contentions that appellant has not made payment of any income chargeable to tax in India and therefore the question of deducting tax at source u/s.195 of the Act does’t arise. It is submitted it be so held now.

2.2 In the facts and circumstances of the case the payment made by the appellant are of nature of business income in the hands of the recipients and in absence of existence of business connection/Permanent Establishment of the recipients in India the Income is not chargeable to tax in India. It is submitted to be held so now.

3. The learned Commissioner has erred in upholding the order of learned Assessing officer considering the remittance made by the appellant towards purchase of computer software as Royalty payment falling within the definition of “Royalty” u/s.9(1)(vi) of the Act. It is submitted that it be so held now.

3.1. Learned Commissioner has erred in not following the Hon’ble Supreme Court decision in case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 wherein Hon’ble Court has clearly held that transaction of sale of computer software packages is clearly a sale of goods. It is submitted it be so held now.

4. Without prejudice to any other ground, Appellant cannot be held to be an assessee in default u/s.201&201(1A) of the Act in view of the retrospective amendment of the Act u/s.9(1)(vi) of the Act vide Finance Act, 2012. It is submitted it be so held now.

4.1. Without prejudice to any other ground, Learned Commissioner has erred in not considering that even after the amendment, the definition of Royalty under the relevant DTAA is narrower in scope compared to the same under the Act and the DTAA definition does not cover payment made by the Appellant within its ambit. Learned Commissioner has failed to appreciate that the Hon’ble Karnataka HC decision in case of Samsung Electronics, solely relied upon by him, does not deal with the said issue.

4.2. Learned Commissioner has failed to deal with Appellant’s contention that I certain DTAAs signed by India (Malaysia, Morroco, Nambia, Russia, Trinadad, etc.), the definition of royalty categorically includes consideration paid for ‘use of computer software’. In absence thereof in the DTAAs in the facts of Appellant’s case, the payments towards purchase of computer software cannot be classified as royalty even under DTAAs.

5. Learned Commissioner has erred in holding that the payments made towards software maintenance, trouble shooting on software problems, comprehensive technical support, upgradation, fixing of bugs, etc. are payments towards ‘royalty’.

5.1.Without prejudice to any other ground, even if the payments made in this regard are construed to be ‘Fees for technical services’ u/s.9(1)(vii) of the Act, it would not be subjected to TDS u/s.195 of the Act as these services do not fall within the ambit of ‘fees for technical/included services’ as per the relevant article of the DTAA.

Your appellant prays for leave to add, alter and/or amend all or any of the grounds before the final hearing of appeal.

2. Briefly stated facts of the case are that the AO framed an order u/s.201(1) & 201(1A) r.w.s. 195 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) dated 28/03/2011. While framing the order, the Assessing Officer observed that before making the payments as recorded in his order at page Nos.1, 2 & 3, the assessee was required to deduct the tax u/s.195 of the Act and deposit the same in the Government account as the said payment for purchase of software licence is royalty u/s.9(1)(vi) and payment for annual maintenance contract, technical support, upgrades, bug fixes, enhancement, data transfer & update services, etc., is fee for technical services u/s.9(1)(vii) of the Act. The AO did not accept the contention of the assessee’s reply filed on 18/06/2008, which are summarized as under:-

 “(i) The transactions relate to mainly purchase of standard software license on payment of specified price and none of the software is developed at assessee’s instance/request and therefore it is mere purchase of goods and the AMC is also related to purchase of software and these payments are not covered as royalty.

(ii) The amount paid to the payee is covered as business profits under relevant DTAA in absence of PE of the payee in India.

(iii) By purchasing any standard software, the assessee has not got any right to reproduce, store, translate or copy the software.

(iv) Maintenance services fees is mainly for acquiring upgrades of software i.e. patch which is a small software. These services for support and debugging assistance are of very low value and they are inextricably linked with the purchase of software. These payments for maintenance fees have to be treated as payment for acquiring software license or for basic assistance to enable use of such software license. As purchase of software license is purchase of goods and therefore not liable to tax in India.

(v) Since the payment is not taxable, the assessee is not liable to deduct tax at source thereon u/s.195.

2.1. The assessee feeling aggrieved by the order, preferred an appeal before the ld.CIT(A), who partly allowed the appeal. While passing the order, the ld.CIT(A) followed the decision of Hon’ble Karnataka High Court rendered in the case of CIT vs. Samsung Electronics Co.Ltd. (203 Taxman 477) and held that the payments for getting licence of software are therefore held to be in the nature of royalty both under section 9(1)(vi) of the Act as well as under the provisions of DTAAs. Further, ld.CIT(A) held that the payments, i.e. acquiring software upgrades, customer support and debugging are part and parcel of the licence. They cannot be taken to be separate from the acquisition of licence itself and, therefore, the entire payments are held to be covered and taxable as royalties under the provisions of section 9(1)(v) as well as respective DTAAs in India and the AO is directed to treat these payments as above instead of ‘fees for technical services’. The ld.CIT(A) also dismissed the ground of the assessee that section 195A is not applicable in the case as the tax is not borne by the appellant under the agreement entered into by it with the concerned payee and, therefore, in view thereof grossing up is not applicable in the facts of the appellant’s case. The ld.CIT(A) observed that the appellant has not proved that the withholding tax which it is held liable to after treating it as the assessee in default, would be recoverable from the non-resident payees, by way of any explicit or implicit agreement or understanding.

2.2. Against the order of the ld.CIT(A), the assessee is in further appeal before us.

3. Apropos to Ground Nos.1 & 1.1, the ld.counsel for the assessee submitted that the ld.CIT(A) has decided against the appellant solely o the basis of Karataka High Court decision in the case of CIT vs. Samsug Electronics Co.Ltd. 203 Taxman 477 that even purchase of software amounts to payment of Royalty and hence liable to TDS under the provisions of IT Act. The appellant respectfully submits that thereafter recently Delhi High Court on 22/11/2013 in the case of Director of Income Tax vs. Infrasoft Ltd. reported at 39 Taxman.com 88, (copy of which was filed during the course of hearing before the Hon’ble Tribunal) has specifically dealt with the decision of Samsung Electronics Co.Ltd. and dissented from the view taken therein. Ultimately, it is held by the Delhi High Court that when the assessee purchases a computer software, there is no transfer of copy right or right to use copy right but a limited right to use the copy righted materials does not give rise to any Royalty income. The relevant paras in the decisions are 86 to 99. The Delhi High Court also analyzed the different agreements for purchase of software (in para 84 to 86 of the judgment) and held that the licence granted by the supplier of the software is non-inclusive, non-transferable and there is no right given to the licensee to copy them or re-sale them, etc. which are also parimateria with the terms of licence granted by the suppliers in the appellant’s case, copies of which are attached in the paper book no.1 dated 15/7/2013, relevant pages being 217, 224, 233, 253 & 255. Thus, the subsequent decision of the Delhi High Court is also squarely applicable to the facts of the appellant and it has to be held that the purchase of software is not Royalty and hence not liable to TDS as decided by the learned AO. The ld.counsel for the assessee submitted that in para 95 of this decision, the Delhi High Court also held that it is not necessary to go through the subsequent amendment to section 9(1)(vi) of the Act for the reason that assessee is covered by the DTAA the provisions of which are more beneficial. The treaty which was examined in that decision and applicable to present assessee are pari materia and hence these observation are also applicable to present assessee. Copies of treaties are attached at page os.124 to 200 of paperbook- II. The ld.counsel for the assessee submitted that the fact that payees do not have permanent establishment in India is already brought to the notice of AO and CIT(A). (Refer para 16.14 on page 30 of the paper-book-I and page 63, para C 1.5 of paper book-I). The appellant also relies on submissions made before learned AO and CIT(A) which are attached at page Nos.44 to 99 and 1 to 31 and 256 to 257 of paperbook No.1, respectively. The ld.counsel for the assessee submitted that there is one more legal angle to this controversy that when there are two decisions from different Courts against each other and none of them is jurisdictional High Court, the decision in favour of the assessee has to be accepted as held by Hon’ble Supreme Court in case of CIT vs. Vegetable Products Ltd. (88 ITR 192). Following this also the appeal of the assessee should be allowed following Delhi High Court decision in the case of Infrasoft Limited.

4. Apropos to Ground Nos.2, 2.1 & 2.2, the ld.counsel for the assessee submitted that as per the decided cases, the payer of income has to look at the legal position prevalent on the date when he makes the payment to decide whether such payment is liable to TDS. If he believes that such payment is not liable to tax, he is justified in not deducting tax and he cannot be treated as assessee in default u/s.201(1) of the Act and cannot be liable to also interest u/s.201(1A) of the Act. Reliance is placed on following decisions, copies of which are attached with this compilation.

(i) Air Canada (Delhi ITAT 88 ITD 545)

(ii) HCL Infosystem Ltd. (Delhi ITAT 76 TTJ 505)

(iii)Chennai Special Bench - Prasad Products Pvt.Ltd. (125 ITD 263)(SB)

4.1. The ld.counsel for the assessee submitted that the payments are made by the appellant during the year under consideration for purchase of software to various overseas parties and for their upgradation, debugging, maintenance, etc. details of which are given by the learned AO in the assessment order on page No.10, TDS on which as per the AO aggregates to Rs.26,26,105/- and interest u/s.201(1A) comes to Rs.11,35,774/-, thus aggregating to Rs.37,67,879/-. All these payments are made during F.Y. 2007-08 when following decisions ruled the roost in favour of the assessee. Copies placed on record.

(i) Delhi Special Bench in the case of Motorola 95 ITD 269 decided on 22/6/2005 (Since the decision is very longish, only headnotes are attached)

(ii) Bangalore ITAT in the case of Sonata Software 6 SOT 700 decided on 28/4/2005.

(iii) Bangalore ITAT in the case of Samsung Electronics Co.Ltd. vs. ITO, 93 TTJ 658 decided on 18/2/2005.

Thus, on the basis of these decided case, including that of Special Bench in Motorola’s case, which were available at the time appellant made payment, the appellant was under a bona fide belief that no TDS is required to be deducted from the payments made to overseas payers as it constituted business income in their hands and since such income is not chargeable to tax in India because they do not have a permanent establishment in India. The appellant, therefore, contends that on this point alone its appeal should be allowed as appellant cannot be said to be assessee in default u/s.201(1) and cannot be liable to interest u/s.201(1A).

5. Apropos to Ground Nos.3 & 3.1, the ld.counsel for the assessee submitted that the appellant in this regard relies on its contentions mentioned against ground No.1 and 1.1 above. Over and above, these contentions, the appellant also relies on the decision of Hon’ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh, 271 ITR 401, where purchase of computer software is considered as that of goods or articles. The appellant also relies on the followings:

(i) Difference between Copyright and Copyrighted article as supported by followings.

(a) OECD Commentary on Model Convention - para 6.1 to 6.4 & para 7.3 to 7.7 of CIT(A) submission (relevant pages 10 -11 & 13-16 of paper-book-I)

(b) Mumbai ITAT’s decision in case of ADIT vs. TII Team Telecom International Pvt.Ltd. (2011) 12 Taxmann.com 502) (Relevant pages 1-14 of paper book-II at page No.11, para-16).

(c) Delhi High Court decision in case of Ericsson A.B., New Delhi (2011) 16 Taxman.com 371 (relevant page 15-41 of paper-book II at page No.15. At page No.19 of the said decision is also discussed retrospective amendment made by Finance Act 2007 and Finance Act 2010 and still held that such payments are not liable to be taxed as Royalty).

(d) Hon’ble Mumbai ITAT’s decision in case of Solid Works Corporation (2012) 18 Taxmann.com 189 (relevant page 42- 57 of paper-book-II at page No.42 and page No.56, relevant para No.14).

(e) Definition of Royalty under DTAA is arrow as compared to definition under IT Act and hence also does not cover sale of copyrighted article. CIT vs. Davy Ashmore India Ltd. 190 ITR 626. (Relevant pages for DTAA between India & USA at 124 to 158 paper-book II).

6. Apropos to Ground Nos.4, 4.1 & 4.2, the ld.counsel for the assessee submitted that the retrospective amendment in the Act cannot compel a person to do something at an earlier date. This is absolutely impossible of performance. The defionition of Royalty was amended by Finance Act 2010 and 2012 to include in its sweep perhaps the purchase of software retrospectively w.e.f. 1/4/1976 but that does not mean that assessee who acted bona fide on the basis of law as understood in F.Y 2007-08 and did not deduct TDS from such payment should be made to suffer by considering him as assessee in default. The appellant relies on Mumbai ITAT decision in the case of Channel Guide India Ltd. 25 Taxman.com 25, copy of which is attached at page no.74 to 86 of the paper book No.II and also Ahmedabad ITAT decision in the case of Sterling Abbressive Ltd., a copy of which is attached with this compilation at page Nos.324 to 333 as well as Mumbai ITAT decision in the case of New Bombay Park Hotel Pvt.Ltd., a copy of which is attached at page No.243 to 249 of the paper book No.III filed on 24/10/2013. The ld.counsel for the assessee submitted that in any case even after considering amended provisions, Delhi High Court in the case of Ericsson A.B. (supra) held that still purchase of software is purchase of copyrighted article and not Royalty and hence not liable to TDS u/s.195. The ld.counsel for the assessee submitted that difference in the languages of DTAA’s indicated different intentions of parties to the agreement and thereby difference in the languages of the DTAA’s to be accordingly give effect to (pages 108 to 123 of paper-book II).

7. Apropos to Ground Nos.5 & 5.1, the ld.counsel for the assessee submitted that the ld.CIT(A) has considered the payment for maintenance fees, customer support ad upgradation and de-bugging of software, etc. as a part fo purchase of software licence and not as fees for technical services. Going by these reasoning of CIT(A) against which department is not in appeal, the appellant would like to rely on its submissions in earlier four grounds wherein the contentions raised for considering software purchase as not liable to TDS will also ipso facto apply to the payment for the above services on the ground that they are considered as part of software licence purchase and therefore if the appellant succeeds on earlier four grounds on the ground that the payment made for software purchase is not liable to TDS, it should also succeed for these payments on the same reasoning. The ld.counsel for the assessee submitted that without prejudice to above, however, if the Hon’ble bench takes a view that software purchase is liable to TDS on the ground that it is a payments towards Royalty, the appellant would like to submit in support of its ground No.5.1 that the maintenance fees, technical support, debugging of the software, etc. are not Royalties but fees for technical services, but since they are not ‘made available’ by the overseas supplier in terms of DTAA between India and Countries of the suppliers, copies of which are attached at page Nos.124 to 200 of paper-book No.II, they are not liable to tax in India and hence not liable to TDS. Reliance is placed on following decisions:

(i) Karnataka High Court in De Beers India Minerals (P) Ltd. (page 87 to 100 of paper-book-II at pages 99 to 100, para 30 & 31).

(ii) Delhi High Court in Guy Carpenter & Co. (pages 101 to 107 of paper-book-II at page No.105 to 107, para 9 to 13)

8. The assessee has placed on record an application praying therein request for admission of the additional evidences.

8.1. For additional evidences, the ld.counsel for the assessee submitted that the appellant has in its paper-book No.III filed on 24/10/2013 with the Registry in which at page No.201 to 206, are the certificates from the overseas suppliers to the effect that they did not have permanent establishment in India with a request letter that the same being additional evidences be admitted as they go to the root of the issue. If the ground No.2 and sub-grounds 2.1 & 2.2 of the appellant that it was not liable to TDS u/s.201(1) and consequently not liable to interest u/s.201(1A) following the contentions mentioned against those grounds is allowed on the ground that the appellant was not liable to deduct TDS due to its bona fide belief that payment for purchase of software is not Royalty, then possible these additional evidences may not be required. However, if the Hon’ble Bench feels that the question whether software sale has to be considered as business income in the hands of payees is to be gone into for determining whether such income accrued in India, even then on the basis of these additional evidences it could be seen that the payees did not have permanent establishment in India and hence such business income is not taxable in India and hence the assessee is not liable to deduct TDS u/s.201(1) and consequently not liable to interest u/s.201(1A). Though the fact that payees do not have permanent establishment in India was brought to the notice of both learned AO and CIT(A) during hearing before them as explained in para 16.14 on page 30 of paper book-I and page 63, para C 1.5 of paper-book I, since they never called upon the assessee to submit evidences for the same as they never dealt with the issue from the perspective of Business Income, these certificates were not filed with lower authorities and hence the need for additional evidences with a request to admit them for doing substantial justice in the matter.

9. On the contrary, ld.Sr.DR supported the orders of the authorities below and also opposed the admission of the additional evidences.

10. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that ground No.1.1 of the assessee is that the order passed by the ld.Commissioner is not a speaking order as none of the contentions of the appellant have been dealt with while rejecting them and adjudication has been made solely based on a case law in which facts were different as also appellant’s contentions were not dealt with. The ld.counsel for the assessee submitted that a different view has been taken by the Hon’ble High Court of Delhi in the case of Director of Income tax vs. Infrasoft Ltd. reported at (2013) 39 Taxmann.com 88 (Delhi). He submitted that the decision is based solely on the judgement of Hon’ble Karnataka High Court in the case of Samsung Electronics Co.Ltd. He also drew our attention to the decision of ITAT Delhi ‘A’ Special Bench rendered in the case of Motorola Inc. vs. Dy.CIT reported at (2005) 95 ITD 269 (Del)(SB) and also to the decision of ITAT Bangalore ‘B’ Bench rendered in the case of Sonata Software Ltd. vs. ITO reported at (2006) 6 SOT 700 (Bang). In the case of Sonata Software Ltd. vs. ITO, the Tribunal has held as under:-

“4. We have considered the relevant facts and arguments advanced. This Tribunal in the case of Samsung Electronics Co.Ltd. vs. ITO (2005) 93 TTJ (Bang) 658 (ITA Nos.264 to 266/Bang/2002, dated 18th Feb., 2005) has recently held that where the software imported which is a shrink wrapped software or off the shelf software, same amounts to purchase of goods and not payment of royalties. The payment is for use of copy rights article and not for acquiring any copy right. This view has been arrived at after considering various decisions on the subject as well as the decision of Hon’ble Supreme Court in Tata Consultancy Services’ case (supra). We, accordingly, hold that the payments for import of software do not amount to payment of royalty chargeable under s.9(1)(vi) of the Act. The payments partakes the character of purchase and sale of goods. Actually, the payee has no permanent establishment in India. Hence, it can be concluded that no income is deemed to accrue or arise in India. Accordingly, the provision of s.195 is not applicable to such payment. The assessee therefore cannot be fastened with liability by treating it as in default under s.101 of the Act. We, accordingly, set aside the order under s. 201(1) as well as charging of interest under s.201(1A) of the Act.”

10.1. The ld.counsel for the assessee has also relied on the judgement of the Hon’ble High Court of Delhi rendered in the case of Director of Income-tax vs. Infrasoft Ltd.(supra). The Hon’ble High Court in the said case vide paras 98 & 99 has held as under:-

“98. We are not in agreement with the decision of the Andhra Pradesh High Court in the case of SAMSUNG ELECTRONICS CO.LTD. (SUPRA) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT vs. M/s.Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software.

99. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income.”

11. After considering the totality of the facts and circumstances of the case and coupled with the facts that the assessee has filed an application for admitting the additional evidences, we are of the considered view that the entire issues require a fresh adjudication at the level of ld.CIT(A). Therefore, the impugned order of the ld.CIT(A) is hereby set aside and the appeal is restored back to the file of ld.CIT(A) to decide it afresh by a speaking order after considering all the case-laws as relied upon by the ld.counsel for the assessee and also the additional evidences as placed on record by the assessee. Needless to say that the ld.CIT(A) will seek a remand report from the AO before passing the order afresh.

12. In the result, the appeal of the assessee is allowed but for statistical purposes.

Order pronounced in Court on the date mentioned hereinabove at caption page.

 

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